Rental property insurance payment received.

Forum|Forum|3 years ago
February 25, 2023
1 reply
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We had hail damage to the entire outside of our rental. Had to replace our roof and all the siding. We received just over 30k from our insurance company, which paid the majority of the expenses. My concern is I think we need to claim this insurance as income? But if I do this, then I can only depreciate the roof and siding, and can't counter the full amount from the insurance company? By the way, the previous roof was only 3 years old, so we were still depreciating that one. How do I work that out? Do I take the remaining years of depreciation left on the first roof as a loss somehow, or something else?

Not A Product Question

Best answer by Vanessa A

You do not report this on your return. This would not be taxable income. The payout from an insurance policy that you are paying for only becomes taxable income when it results in you being in a better financial situation than you started. So, even if you didn't replace the roof, your roof had damage (currently in the amount the insurance company assesses it to be with the check they sent you). So at this point, you have been made whole. You do not have a gain in your overall asset/wealth. So you would not report the payment on your taxes at all this year.

If they paid you more than the roof was worth, then you would have a gain for the amount they "increased your wealth" and only that part would be taxable.

Carl11_2

Employee

Typically, all income received from any source for any reason, for rental property can be reported as rental income. It's reportable and potentially taxable as such, because all the insurance premiums you paid were a tax deductible business expense. However:

For an insurance payout you typically reduce your cost basis by the value of the loss, then increase the cost basis by the cost of the restoration. So it's possible for those two equations to zero each other out, resulting in no change.

Now, if the property was not habitable between the time the damage occurred and the time the repairs were completed, *and* your insurance payout included an amount for "loss of rent", that amount is definitely reportable as rental income, since the insurance company paid you rent for the period of time it was not habitable.

Now I'm sure you had a deductible which you had to pay. But, if the cost of repairs cost less than the insurance payout, then any excess insurance money would be reported as rental income. While possible, I don't see that being your case, so will not discuss that any further.

Assuming the cost of restoring the property to it's condition prior to the event that damaged it does not cause a change in your cost basis (meaning the insurance covered the cost 100% with nothing out of your pocket) you really don't need to report anything concerning the event on your tax return, other than any "loss of rents" the insurance company paid.

However, if you did have to pay anything out of your pocket for the restoration, that would add to your cost basis of the property. You can just enter that amount as an asset and call it something like "new roof/siding" or whatever, classify it as residential rental real estate and start depreciating it over the next 27.5 years.

There would really be no need to report the insurance payout since the reduction in cost basis was offset by the restoration paid for by the insurance company.

Just keep in mind that any portion of the payout that is designated by the insurance company as payment for "loss of rents" is included in the total rental income received for the tax year regardless of what you may have actually used that money for. Typically, insurance will pay up to 85% of the monthly rent you were receiving from the tenant before the event, for anywhere from 6 months to a full year. It just depends on the policy.

memememeAuthor

Thank you for your answer. We were lucky that our tenants were able to stay in the home. I have one more question about the roof replacement. We put on a new roof 3 years ago, and have been depreciating it. But now with the roof replacement, do we start depreciating it anew, or just continue with the previous depreciation? Thank you in advance for your advise!

Carl11_2

Employee

With the "old" roof from 3 years ago,elect to edit/update that asset.

Write down the amount of cost for the asset, and the amount of "prior Deprec" already taken and continue.

Work through that asset and indicate that you "stopped using this asset in 2022". On the next screen enter the date it was no longer usable; i.e.; the date of the loss.

On the "Special Handling Required?" screen, read it to understand why I'm telling you to click YES. Then click YES on that screen.

Write down the "current year depreciation" on that roof asset.

Now add together the "prior Deprec" and the Depreciation Deduction Amount for 2022 to get the total depreciation taken on the roof.

Now subtract the total depreciation from the original "cost" of the roof.

This final total is what you can claim as a Miscellaneous Expense in the rental expenses section. It will allow you to claim a loss on the old roof for what is not already depreciated, since the roof was a total loss.

Next, you'll enter your new roof asset with an obvious in service date sometime in 2022 - typically the day after the work was completed.

So for 2022 you'll have two roof assets listed; the old roof and the new roof Next year, you can just delete the old roof asset if it gets imported.

There's another way to do this too. But to me, this seems to be the simplest to explain in a text based communications medium such as this forum.